The Eurozone after Stress Testing Charles Wyplosz The Graduate Institute, Geneva The Israeli Association for the Study of European Integration Annual Conference October

Stress Testing Two crises have shown the Eurozone resilience  Reasonably good performance over  Terrible policies since 2010, but Eurozone still whole Always been known that asymmetric shocks are difficult to handle  And what a shock! The sovereign debt crisis has exposed 6 flaws  Most of them were well identified

Flaw No. 1: Fiscal discipline Well understood requirement Wrong solution: the Stability and Growth Pact Arbitrary rule and impossible sanctions: no teeth Fundamental conflict with national sovereignty Repeated failures led to:  First, more flexibility  Second, more rigidity  Bureaucratic monster Concept must be changed

Flaw No. 2: The banking system One money, one central bank, one banking system  One set of regulations  One supervisor  One resolution authority Bank crises can be very costly  The ostrich policy The crisis led to Banking Union  Great progress  Work not completed

Flaw No. 3: An incomplete central bank Many impediments  Fear of redistribution  Divergent national views  Different national cyclical needs The ECB was expected to defend collective interest The ECB was paralyzed and made huge mistakes  Bailout of Greece, refusal to write debt down  Failure to back sovereign debts  Behind the curve

Flaw No. 4: Sovereign debt relief Some public debts were too large No mechanism for debt relief  National interests in the driving seat The situation has grown much worse  National politics in the driving seat Stealth solution for Greece  No framework in place

Flaw No. 5: Intrusiveness Many countries suffer from economic mismanagement  Continuous budget deficits  Continuous external deficits  Unreformed sclerotic economies Budget deficits: an essential common concern External deficits not an issue once fiscal disciple is established  Private borrowers and lenders are consenting adults Reforms: a deeply sovereign issue Programs and processes are intrusive

Flaw No. 6: Governance Community method has disappeared Intergovernmental method cannot work  19 ministers unable to make decisions Emergence of an hegemon: Germany  A deeply conflicted manager

Conclusion One problem (half) solved The others remain They are now recognized  But hard to solve Political Union cannot be the solution It takes decade to forge institutions